Category Archives: Curiouser and Curiouser

Then Again, We Might Fire Them

Note to companies headquartered in Kansas: be careful when telling investors that you are eager to retain your senior officers.

In a securities class action against Sprint Corp., the plaintiffs based their claims on Sprint’s March 26, 2001 statement that it had entered into new employment contracts with its CEO and COO that were “designed to insure their long-term employment with Sprint.” According to the plaintiffs, this statement was misleading because Sprint knew that it might have to fire these officers as the result of a tax avoidance issue. In its motion to dismiss, Sprint argued that it had no duty to disclose this information because its statement did not “foreclose the possibility” that the CEO and COO might later be terminated.

The court disagreed with this characterization of the statement. See State of New Jersey and its Division of Investment v. Sprint Corp., 2004 WL 1960130 (D. Kan. Sept. 3, 2004). In finding that a duty to disclose existed, the court held that “Sprint’s statements that the contracts were ‘designed to insure’ the long-term employment of [the CEO and COO] could reasonably have led an investor to conclude that the termination of [their] employment (at least in the near future) was simply not an option from Sprint’s perspective.”

Although the court may have correctly found that a duty to disclose existed, the rationale it used is curious. Did Sprint really need to say, “then again, we might fire them,” for a reasonable investor to realize that it is always possible for the employment of a CEO or COO of a corporation to be terminated? Guess so.

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Harvard Law School Settles Estate Claim

Last year, The 10b-5 Daily posted about the unusual legal battle over the estate of Harvey Greenfield. Greenfield was a well-known plaintiffs’ securities class action lawyer who passed away in 2002. Although Greenfield had told people that he planned to leave the bulk of his estate (valued at $35 million) to Harvard Law School, a will could not be located after his death. Harvard filed a claim against the estate. The New York Law Journal reports today that a settlement has been reached between Harvard and Greenfield’s sole living heir to fund a securities law professorship in Greenfield’s name with about $2.8 million.

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That’ll Cost You 1 Million Euros

Securities class actions brought against foreign companies, or their advisors, in U.S. court can be an adventure.

KPMG-Belgium was the auditor for Lernout & Hauspie Speech Products NV, the Belgian software maker that collapsed amid revelations of accounting fraud. A securities class action was brought against KPMG-Belgium and others in the D. of Mass. After the denial of KPMG-Belgium’s motion to dismiss, pretrial discovery commenced in September 2002 with plaintiffs serving document requests for auditor work papers.

KPMG-Belgium refused to comply with the requests, asserting that producing the papers would violate Belgian law (plaintiffs were, however, able to examine the documents as part of the Belgian criminal investigation). Plaintiffs moved to compel the production of the documents and, on November 13, 2003, a magistrate judge granted the motion. Shortly thereafter, KPMG-Belgium filed an ex parte petition with a court in Brussels seeking to enjoin the plaintiffs from “taking any step” to proceed with the requested discovery. To obtain compliance, they asked the Belgian court to impose a 1 million euros fine for each violation of the proposed injunction.

The U.S. district court issued an antisuit injunction enjoining KPMG-Belgium from pursuing the Belgian court action. KPMG-Belgium appealed. Last week, the First Circuit affirmed the district court injunction order, holding that “[w]here, as here, a party institutes a foreign action in a blatant attempt to evade the rightful authority of the forum court, the need for an antisuit injunction crests.”

The Wall Street Journal has an article (subscrip. req’d) on the decision.

Quote of note (WSJ article): “That means KPMG-Belgium could soon be faced with a stark choice: It can hand over the documents. Or the firm can disregard [the district judge’s] orders. In that event, she has warned that she may enter a default judgment for the plaintiffs, exposing KPMG-Belgium to potentially billions of dollars of liability. A KPMG-Belgium spokesman, Jos Hermans, on Friday said, ‘There hasn’t been a final decision on what we’re going to do,’ although one could come this week.'”

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This Is No Fairy Tale

Close on the heels of the Copper Mountain decision (the “fairy tale” case) comes another remarkable lead plaintiff/lead counsel order. In the Terayon securities class action, Judge Marilyn Hall Patel of the N.D. of Cal. has both disqualified two of the lead plaintiffs and found it “probable” that lead counsel must also be removed.

Terayon Communication Systems, Inc. is a Santa Clara-based maker of cable modem equipment. The securities class action against the company, initially filed in April 2000, is based on allegedly misleading statements concerning the company’s ability to obtain certification for its technology.

Judge Patel originally appointed Cardinal Investment Co. and Marshall Payne (an employee of Cardinal) as two of the lead plaintiffs in the case. It came out in discovery, however, that Cardinal and Payne were significant short sellers of Terayon stock (hundreds of thousands of shares) and in early 2000 had begun a campaign to flood the market with negative information about the company. The campaign included phone calls to the certification entity, starting Internet chat room rumors, letters to the SEC, and contacts with financial reporters.

Moreover, Cardinal was apparently working closely with plaintiffs’ counsel (later lead counsel for the class) during this period. Starting in February 2000, Internet website postings encouraged parties to contact plaintiffs’ counsel about a proposed lawsuit against Terayon. According to Judge Patel, “the class period in the original complaint, i.e. the first day on which plaintiffs claim they were damaged, was February 9, 2000 the same day these Internet postings appeared. Defendants assert that these web postings were part of plaintiffs’ alleged scheme to drive the price of the stock down.”

On April 11, 2000, the same day as a Terayon earnings conference call during which the company’s executives were sharply criticized by short sellers using phony names, an investor plaintiff signed a sworn statement authorizing the filing of a complaint that closely tracked the language of Cardinal’s letters to the SEC. It was not until the next day, however, that the price of Terayon’s stock dropped significantly. The complaint was filed on April 13.

Following the revelation of these facts, defendants moved to have Cardinal and Payne removed as lead plaintiffs. Judge Patel has agreed and more.

The court found “[w]hile some short sales may not, in and of themselves render a lead plaintiff’s claims atypical, a pattern of affirmatively engaging in campaigns devised to lower the price of the stock in question certainly contains within it the seeds of discord between lead plaintiffs and the remaining plaintiffs.” Accordingly, the court removed Cardinal and Payne as lead plaintiffs (and also noted that they “appear to have participated, if not perpetrated, a fraud of their own on the market” and could be subject to claims by their fellow shareholders).

As for lead counsel, the court expressed concern over lead counsel’s pre-suit involvement with Cardinal and its apparent efforts “to mislead the court as to the scope and nature of lead plaintiffs’ holdings in Terayon stock” as part of the lead plaintiff selection process. Based on this course of events, the court wondered “whether counsel for plaintiffs actively participated in or provided advice to plaintiffs regarding their scheme to cause a fall in Terayon’s stock price” and invited a motion on whether lead counsel had waived privilege. In any event, the court found “it is probable that there is a conflict not only between lead plaintiffs and the class but also between lead counsel and the remainder of the class.” Lead counsel was asked to provide a written response to a number of questions and defendants were given leave to take further discovery on the issue.

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Fairy Tales, Lead Plaintiffs, And The PSLRA

If the judge ain’t happy, ain’t nobody happy. Proving that axiom correct, Judge Vaughn Walker of the N.D. of Cal. issued a fairly amazing order last week in the Copper Mountain securities litigation, expressing displeasure with both plaintiffs and the 9th Circuit over the lead plaintiff/lead counsel selection process in that case.

The PSLRA provides that the “presumptively most adequate lead plaintiff” in a securities class action is the movant who “has the largest financial interest in the relief sought by the class” and “otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure.” To summarize the process, the judge’s task is to determine which plaintiff has the largest financial interest, evaluate whether that plaintiff meets the adequacy and typicality tests of Rule 23(a), and, if that plaintiff meets the requirements, declare that plaintiff the presumptive lead plaintiff (a presumption that may then be rebutted by other plaintiffs). The court must also approve the lead plaintiff’s choice of counsel.

Three years ago, Judge Walker determined that he would not name the lead plaintiff movant in the Copper Mountain case with the largest financial interest as lead plaintiff because that candidate, known as the CMI Group, failed to demonstrate that it was an adequate lead plaintiff. Judge Walker based his decision on the CMI Group’s failure to negotiate a “competitive” fee arrangement with proposed lead counsel and named a different movant as lead plaintiff. See In re Quintus Sec. Litig., 201 F.R.D. 475 (N.D. Cal. 2001) and In re Quintus Sec. Litig., 148 F. Supp. 2d 967 (N.D. Cal. 2001).

The CMI Group petitioned the Ninth Circuit for a writ of mandamus. In In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), the court overruled Judge Walker’s decision. The panel, in an opinion written by Judge Alex Kozinski, found that the lower court had failed to follow the statutory language of the PSLRA in appointing the lead plaintiff. In particular, the court found that “a straightforward application of the statutory scheme . . . provides no occasion for comparing plaintiffs with each other on any basis other than their financial stake in the case.” Moreover, the lead plaintiff process “is not a beauty contest” and information about fee arrangements “is relevant only to determine whether the presumptive lead plaintiff’s choice of counsel is so irrational, or so tainted by self-dealing or conflict of interest, as to cast genuine or serious doubt on that plaintiff’s willingness or ability to perform the functions of lead plaintiff.” Accordingly, the Ninth Circuit vacated the lower court’s order and instructed the lower court to proceed with the CMI Group as the presumptive lead plaintiff.

On remand, however, the CMI Group apparently decided to no longer seek lead plaintiff status (or, as Judge Walker puts it, “vanished – fled the scene – gone south – maybe vaporized”). In his order, Judge Walker compares the situation to a “heroic prince” turning into a “frog” and is incredulous over the course of events:

“By vindicating their ‘right’ to be the presumptive lead plaintiffs through the extraordinary remedy of mandamus (and establishing circuit precedent of no little value to their lawyers), the CMI group might seem to possess a tenacity and determination seldom seen on the battlegrounds of federal litigation. But what might seem apparently is not. Could there have been some motivation other than vindicating the interests of defrauded investors behind the mandamus proceedings? Could it be that the Ninth Circuit panel, perceiving the black letter of the PSLRA, was actually reading a fairy tale?”

Also not surprisingly, Judge Walker appears to believe that the CMI Group’s decision vindicates his earlier order. Noting that “Cavanaugh would seem to establish that the largest stakeholder’s selection of counsel must be approved unless that selection is either mad or crooked,” the court finds that the opinion converts the PSLRA into “a straightjacket against judicial measures to ensure that [securities class actions] genuinely benefit investors, not lawyers.” In the absence of the CMI Group, Judge Walker ends up simply reappointing the earlier lead plaintiff to the position. “The moral of the story,” the court concludes, “will be left to you, dear readers.”

The Recorder has an article (via – free regist. req’d) on the case in today’s edition. Judge Walker’s order is not yet available online.

Addition: The opinion is now on Westlaw – In re Copper Mountain Sec. Litig., 2004 WL 369859 (N.D. Cal. Feb. 10, 2004).

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You’re No Martha

According to a Reuters report, plaintiffs’ counsel in the securities class action pending against Parmalat SpA in the S.D.N.Y. has sought a court order preventing the destruction of documents by the company and its advisors. District Judge Lewis Kaplan was apparently unimpressed with the request. Noting that destruction of documents is a criminal offense and any order would be redundant, the judge suggested at a hearing on Friday that the request for an order was done mainly for the benefit of the media. “If anyone wants to file papers on this, God bless them,” Judge Kaplan said. “But don’t waste my time.”

Quote of note: In response to plaintiffs’ counsel’s description of the Parmalat case as “unusually high-profile,” Judge Kaplan responded – “Not by the standards of this district. There is nobody named Martha in this case.”

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Wanted: Employees With A Story To Tell

The State Treasury and Attorney General of Connecticut are leading a securities class action against JDS Uniphase Corp. (Nasdaq: JDSU), a San Jose-based fiber-optic components maker. In an interesting development, Reuters reports that the Attorney General has taken out an advertisement in the Ottawa Citizen newspaper (JDS Uniphase used to have part of its headquarters in Ottawa and still has 580 employees there) discussing the case and urging JDS Uniphase employees to dislcose what they know about the company even if they’ve signed confidentiality agreements.

Quote of note: “‘Some employees may have signed confidentiality agreements, but the court agreed with the Treasurer’s Office and the Attorney General that employees cannot be prevented from telling what they know,’ the advertisement said.”

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